Chancellor rules out CGT nuclear option: these are the alternatives

Chancellor John Healey, pictured at the Manufacturing Technology Centre in September in Coventry, England. Photo: Betty Laura Zapata - WPA Pool/Getty Images.

One of the dominant policy rumours ahead of this year’s Autumn Budget has apparently been squashed.

The Financial Times reported yesterday that Chancellor John Healey will not equalise capital gains tax (CGT) rates with income tax later this month, despite pressure from senior Labour MPs, a move that if true will be warmly welcomed by investors.

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For the third major fiscal event in succession, speculation has swirled that the government is eyeing up a bumper raid on CGT, with reports of further hikes in addition to those introduced at the 2024 Budget.

Matching CGT with income tax would have been the nuclear option for a government seeking to boost its coffers, vaulting the top rate from 24% to 45% in England, Wales and Northen Ireland, and 48% in Scotland. Although presumably to support such a drastic hike, Healey would’ve reintroduced some kind of indexation or taper relief to protect investor returns from inflation.

But it appears this approach has now been ruled out, with concerns that aggressively hiking rates could backfire and cause Treasury receipts to fall rather than rise.

It does not, however, mean that CGT reform will be absent on 28 October – especially given Healey’s recent comments on the UK’s “low rates” compared with our neighbours.

There are various levers the government could pull to beef up CGT receipts, and not all involve jacking up the headline rates. Here we explore alternative options for the chancellor, and outline some simple, no-harm steps you can take before the Budget to protect your wealth from HMRC.

Are UK CGT rates the lowest in the G7?

A couple of recent developments had kicked the CGT rumour mill into overdrive. First, Labour donor Dale Vince proposed equalising CGT with income tax to help fund a £3,000 increase to the tax-free personal allowance. Vince claimed that this could raise an extra £14 billion for the government, although experts fiercely challenged these numbers. I examined this story in more detail here.

Second, in late September Healey told TheSunday Times that the UK has the “lowest capital gains tax of any European G7 nation”, further stoking fears that wealth taxes were firmly in his crosshairs with the Budget looming, perhaps to free up cash to offer households “breathing space” from the cost of living.

In light of Healey’s comments, I decided to examine the other European nations’ CGT frameworks that Healey stacked us up against: France, Germany and Italy.

CGT rates across European G7 countries

So, do the chancellor’s claims hold water? Well, just about, but it’s marginal in two of the cases – we’re talking one to two percentage points – and only if you focus on the headline CGT rates.

Different countries have different ways of collecting taxes, meaning a more in-depth assessment is required to establish whether one jurisdiction’s tax framework is more favourable for investors than another’s. Weighing up the UK state pension against what other countries provide presents similar challenges. It’s hard to truly compare like for like.

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Take Germany, for example. Interest and dividends are treated as capital gains and therefore taxed at 25%, plus any extra bits. Whereas in the UK, investors could pay up to 39.35% on any dividends and 45% (48% in Scotland) on savings interest; and the latter is rising two percentage points across all bands from 6 April 2027.

In Italy, there are exemptions for certain assets such as property, while a higher 33% rate applies to cryptocurrency.

For the sake of balance, we should note that there are various exemptions and allowances that UK investors can use to offset, mitigate or swerve CGT.

But in summary, the picture is far more complicated and shows that purely comparing headline CGT rates can never tell the full story.

Alternative options to raise CGT receipts

Official figures and forecasts from HMRC may offer one reason why Healey has chosen to avoid lifting CGT rates to match income tax.

According to the UK’s tax authority projections, increasing CGT by 10 percentage points would trigger a net reduction in receipts, costing the Treasury more than £3.5 billion by 2028-29.

That’s because lifting rates to a level deemed unpalatable for investors could cause many to either flee the UK or hold off selling assets in the hope or expectation that rates will revert in the future.

Importantly, you only pay CGT once you “dispose” of an asset – so either sell it, or transfer it to someone who isn’t exempt. What’s more, CGT isn’t payable on death, another reason to discourage people from selling assets unless they really need to.

• End CGT uplift on death?

That brings us to one potential policy change that Healey could deliver to try and raise CGT receipts: ending or reforming CGT’s exemption on death.

However, as this has been a feature of the CGT regime since 1965, any reform would be highly controversial. The Office for Tax Simplification (OTS) in its 2020-21 review of CGT, proposed replacing the uplift on death with a “no gain, no loss” basis, treating the asset at the historical cost base of the deceased.

Governments haven’t acted on the OTS’ proposal, perhaps due to the risk of a fierce backlash from investors as estate beneficiaries could be hit with inheritance tax (IHT) on receiving the asset and then a hefty CGT bill when it’s sold; a punitive tax double whammy, compounded if the heirs are also double-taxed (IHT and income tax) on inherited pension savings if death occurs after 6 April 2027.

• Introduce a smaller increase to headline rates?

Over the past week, reports have emerged of investors selling assets ahead of the Budget in fear CGT rates will rise sharply. And as the 2024 event underscored, CGT is an area of the tax system where hikes can take effect immediately, giving investors no breathing space to lock in the lower rates.

Investors planning to realise gains in the next few months may therefore have accelerated disposals, as we can predict with some confidence that CGT rates won’t become more favourable on 28 October.

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Whether this behaviour will settle down in response to this week’s news is unclear. As noted above, the nuclear option might be ruled out, but a gentler increase to the headline rates remains possible. The government could, for example, return the top rate to 28%, the figure introduced by George Osborne in 2010, which lasted until 2016 for shares and other assets and 2024 for residential property.

• Further cuts to annual exemption?

In other instances, investors have been harnessing their £3,000 annual CGT exemption ahead of the Budget - concerned that this handy feature might be cut in two weeks’ time - and shifting the proceeds into a stocks and shares individual savings account (ISA) to protect future gains from tax. This is a handy process known as Bed & ISA.

The government has recently viewed the CGT allowance as low-hanging fruit, administering swingeing cuts in the past few years. It dropped from £12,300 to £6,000 in 2023-24 before halving again the following year, restricting scope for investors to realise profits every year, tax free.

Trimming the current £3,000 figure, or removing the exemption entirely, is an option for Healey at his first Budget, but one could argue this area of the CGT framework has received enough rough treatment.

In contrast, investors may reasonably expect the CGT allowance to start ticking up again at some point to reflect rising asset values. The combination of the UK’s precarious financial position and the government’s commitment to keeping tax thresholds frozen as a sneaky revenue-raising tactic, means such generosity is unlikely in the short term.

Three smart no-harm CGT moves ahead of the Budget

It’s important to stress that we have no idea whether Healey will shake up the CGT landscape in precisely two weeks’ time, or what shape any possible reforms might take. It is purely speculation at this stage. There are, however, some simple steps you can take before the Budget to streamline your tax affairs without causing your long-term future any harm.

1. Fill up your ISA

You have until 5 April 2027 to use up this year’s £20,000 ISA allowance but it can make sense to pay in as much as you can now. Not only will any gains and dividends be immediately shielded from tax, but your money can benefit from market growth sooner.

2. Use your annual exemption

The same deadline applies to your annual exemption, which like the ISA allowance, is “use it, or lose it” - you can’t roll over any unused amount to a future tax year. If you have holdings outside tax wrappers, using your CGT exemption sooner rather than later won’t derail your finances. And if you have some ISA allowance spare, channelling the profits in this account could make it an extra canny move.

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3. Team up with your better half

A further key exemption with the CGT frameworks is that transfers to spouses and civil partners don’t trigger a CGT charge. Undertaking this exercise allows you to harness two annual exemptions and can also be prudent if you’re looking to trigger a taxable gain and one spouse sits in the lower CGT bracket, helping to trim your HMRC bill.